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Texas – Taxability of Purchases Made by an Air Carrier

SALT Report 1866 – A Texas Administrative Law Judge upheld portions of a tax assessment imposed on a licensed air carrier that leased facilities from a publicly-owned airport in Texas. The Taxpayer filed a claim for redetermination and the Administrative Law Judge determined the taxability of the purchases as follows.

The Judge determined that the Taxpayer was not eligible for a sales tax exemption on its purchases of maintenance supplies and lighting fixtures because the exemption is limited to items sold to, or used by, an exempt governmental entity. Although, the airport authority is an exempt entity, the Taxpayer is a private entity. Therefore, the Taxpayer’s claim that the purchases should be exempt because they were primarily used for the benefit of an exempt entity was rejected.

However, the Judge determined that the Taxpayer’s purchase of software maintenance services was determined to be exempt because the maintenance services were performed by a person who did not sell the software. In Texas, parent companies and their subsidiaries are recognized as separate entities for sales tax purposes. Therefore, because the software was originally purchased from a vendor whose subsidiary provided the software maintenance service did not bar the Taxpayer from claiming the exemption.

Additionally, the Taxpayer’s purchases of data processing services that allowed it’s customers to search passenger flight schedules and fares on the Taxpayer’s website qualified for the multistate sales tax exemption. The services were used to support the Taxpayer’s passenger flight service which is used by customers that are both in and out of Texas. The Judge determined the Taxpayer’s method of allocating the services use was reasonable and supported by its books and records. Therefore, the portion that was used by customers that were outside Texas was exempt.